The idea of creating a bad bank to assume the risky investments of financial institutions is being considered by top U.S. policy makers as a way of healing the financial system.

Treasury Secretary Henry Paulson said federal regulators have considered creating an aggregator bank that would buy up risky and bad assets from U.S. financial firms.

A lot of work has been done on an aggregator bank and other methods for using a $700 billion bailout fund to let it go further when dealing with illiquid assets, Paulson told reporters in Washington today, according to Bloomberg.

Federal Deposit Insurance Corp. chair Sheila Bair said on CNBC that the idea might have some merit.

Earlier in the week, Federal Reserve chairman also referred to possibility of such an approach.

Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank, Federal Reserve chairman Bernanke said Tuesday.

Ben Bernanke